The Sales Tax Nexus Demystified
Once upon a time in the “good old days,” businesses did not have to worry about sales tax when selling online. E-commerce was a selling channel free from the compliance headaches of filing sales tax, way back when. Until the summer of 2018 brought about changes. Changing sales tax nexus into three little words dreaded by businesses across the United States that once thought online sales and sales tax requirements had no cross-section. Accounting pros have had time to get up to speed on the changes to the sales tax nexus. We’ve outlined the TLDR (too long didn’t read) version of the sales tax nexus requirements and how it impacts your online selling efforts.
What You Need To Know About The Sales Tax Nexus:
Sales Tax Nexus Defined – Defining the sales tax nexus, like most accounting-related principles, can get a smidge complicated. The high-level answer is you don’t know if your state has a sales tax nexus, it behooves you to find out. Sales tax nexus occurs when your business has some kind of connection to a state. The definition of sales tax nexus varies from state to state, but most states consider you in the nexus if you have a physical presence in that state. Physical presence can be defined in the following ways: having an office, a warehouse, an employee or an affiliate of your business based in the state where purchases are being made. For example, if you have a warehouse in Florida and a buyer makes an online purchase in Florida, you may have a sales tax obligation to the state of Florida – even if your headquarters are in Utah. Another important factor is what’s described as the “economic connection” to the state. This connection can be categorized as clocking a high proportion of sales revenue in a specific state. One other condition that comes into play is regarding a temporary business relationship within a state such as a pop-up shop or a tradeshow.
The Sales Tax Nexus Backstory – The glory days of online selling with no sales tax obligations ended in June of 2018 when the Supreme Court ruled in favor of the state in South Dakota v. Wayfair, Inc. This ruling deepened the requirements of businesses to pay sales tax in states that they didn’t have a physical presence in but had a high level of economic activity in. The economic nexus is now based on sales revenue, transaction volume or a combination of criteria.
Having Said All That – So, now that we have the details, the next logical question is: how does this impact my business? Here’s a checklist of considerations for your business and its possible sales tax nexus obligations:
- Start by defining the places where you may have a sales tax obligation. Knowing where you do business is an important first step to defining your sales tax nexus obligations. If you are selling your products online, you may have to dig into your sales data to gain understanding of all the places where you’re selling. This data should be revisited on a regular basis to ensure your business is covering all its sales tax compliance bases.
- Understand origin sales tax versus your destination sales tax rates. If your business is located in an origin-based state, your state and local sales tax rates is applied to everyone who you ship taxable items to in that state. If you are located in a destination-based state, you must calculate the sales tax rate based on where your buyer is located.
- Drill down on remote seller tax rules which also vary by state. To further complicate your sales tax nexus requirements, there is a third element that could change the sales tax rate – remote seller. Some states have different sales tax requirements based on whether your business is headquartered there (home state nexus) or you are considered a “remote seller.”
- Consider hiring a professional to manage the intricacies and keep you in compliance. Calculating your online sales tax obligations, as you can see, is more complex than ever before, and to add to the challenge, the e-commerce platforms all have different functionalities. And, they don’t always integrate with your QuickBooks or other accounting software.
One of the best ways to save time, ensure compliance and streamline your e-commerce and sales tax processes is to tap the pros Agile Planners for assistance. We can take this function of your business right off your plate so you can rest assured that your sales tax nexus is covered and continue reaching toward your high-level business objectives. Agile Planners specializes in:
- Complete bookkeeping services (including keeping your business in compliance with its sales tax nexus requirements).
- Consulting services to help you use technology to its optimal potential to reach your business objectives.
- Training services to help your team understand how to get systems talking to each other and eliminate bottlenecks and silos that prevent success.